Fitch Ratings affirms Uzbekistan’s Almalyk Mining and Metallurgical Complex's long-term IDR at 'BB-'

By Mokhi Sultanova in Tashkent May 23, 2024

Fitch Ratings on May 21 affirmed Uzbekistan’s JSC Almalyk Mining and Metallurgical Complex's Long-Term Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.

It said Almalyk's rating was now equalised with that of its sole parent, Uzbekistan sovereign (BB-/Stable). “This is due to the strong ties between the company and the state under Fitch's Government-Related Entities (GRE) Rating Criteria. We assess Almalyk's Standalone Credit Profile (SCP) at 'b+', reflecting its small but increasing scale of operations, commodity diversification into copper, gold, zinc and silver, a favourable cost position of its main asset, long reserve life and moderate leverage,” the rating firm stated.

Almalyk's current reliance on a single mine will decrease once the greenfield copper-gold Yoshlik project is commissioned. The execution and financial risks linked to the first stage of development (mining and concentrator) are reducing as it nears completion towards the end of 2024, noted Fitch, adding: “The second stage of the project (smelter) is only expected to be finalised in 2026, so liquidity remains stretched due to expected negative free cash flow reflecting high capex and not yet finalised funding for the second stage. The rating also reflects concentration of operations in one country with a weak operating environment.”

Looking at key rating drivers, Fitch said: “We view 'Decision Making and Oversight' factor as 'Strong' as the company is 98% owned by the state, although it may consider selling a minority stake in the future. The state has tight control over the company, overseeing operating activity, the budget and investment programme. We assess precedents of support as 'Strong' as the government provided a USD1.0 billion equity injection for the Yoshlik project over 2017-2022 and a further USD0.3 billion is expected in 2024.”

Almalyk, added Fitch, will convert a loan of around $700mn provided by the Fund for Reconstruction and Development of Uzbekistan (FRDU) into equity in 2024. The state will not provide guarantees for new debt for Yoshlik, “but we expect strong state support if there are any cost overruns or commodity price downturns. As of 2023, 24% of debt was guaranteed. Following the drawdown of other loans for Yoshlik, we expect this to decrease towards 16% in 2025,” said Fitch.

Fitch also observed: “We assess Almalyk's preservation of government policy role as 'Strong' as it is responsible for all copper produced in the country with around 60% of current volumes consumed internally. Almalyk is also the second-largest taxpayer, the second-largest exporter and one of the major employers in Uzbekistan. We view 'contagion risk' as 'Strong' as Almalyk is gradually increasing its share of external funding for the Yoshlik project as it expects the smelter to be financed by a foreign syndicate. We believe Almalyk's default could affect the ability of Uzbekistan and other GREs [government-related entities] to borrow on international markets.”

Fitch described Yoshlik as a transformative copper, gold and silver project for Almalyk and the country's mining industry, which should double the company's production scale and asset diversification. “Its first phase has a USD4.8 billion budget, and comprises a new mine and a processing plant that will substantially increase the company's copper output to 264,000 tonnes (t) by 2026 (up 78% from 2023) and gold output to over 800,000 ounces (oz) by 2026 (up 50%),” said Fitch.

It added: “The second phase, which includes construction of a new copper smelting plant for approximately around USD1 billion, should increase Almalyk's smelting capacities. Until the smelter is completed, the company will be selling copper concentrate. Construction works have started and the tender process for equipment purchase is in progress. We expect the project to be funded by an international syndicate and loans from equipment suppliers.”

Assessing execution risk, Fitch said: “Almalyk has limited experience in delivering projects of this scale and is exposed to cost overruns and delays. Due to geopolitical issues and the pandemic, the project commissioning has been delayed by around one year. We expect that copper (concentrate) production at Yoshlik will start towards the end of 2024 and that smelter will be commissioned by end-2026.

“Given the current advanced stage of the project with around 60% of capex spent as of February 2024, risks for the first stage have reduced.”

In a note on corporate governance, the rating agency said: “Similar to other state-controlled companies in Uzbekistan Almalyk is improving its corporate governance. It started publishing IFRS financials (although interim results are not available) and re-estimated its reserves according to the JORC international standard. The company includes one independent director, while the board is dominated by state representatives. The proposed IPO has been pushed back.”

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